Credit card borrowing falls as consumers feel squeeze

UK consumers cut back on credit card borrowing in May amid fears over rising interest rates and a slowing economy driven by a cost of living crisis.

Monthly figures from the Bank of England showed that consumer borrowing fell to a four-month low of £800 million in May, from £1.4 billion in April. Half of all borrowing, £400 million, was in the form of credit card loans and May’s total figure was below a pre-pandemic average of £1 billion and undershot economists’ forecasts.

“The more muted rise in unsecured borrowing in May suggests the cost of living crisis and recent plunge in consumer confidence are prompting households to exercise a bit more caution,” Nicholas Farr, of Capital Economics, said. “That adds to reasons to think consumer spending is struggling and that the economy will be very weak over the coming months. The weakness in total unsecured lending suggests some households are now thinking twice before purchasing big ticket items.”

The Bank of England is raising interest rates at its fastest pace since the 1990s to tackle inflation at a 40-year high in the face of a slowing economy. The Bank rate was raised by 0.25 percentage points to 1 per cent in May, the highest since early 2009. The economy is on course to have contracted in the three months to June, after a fall in GDP of 0.3 per cent recorded in April, according to the Office for National Statistics.

Mortgages and household borrowing jumped in May, suggesting that homeowners may be aiming to lock in lower rates as monetary policy is tightened over the coming months. Mortgage approvals rose to 66,200 in May from 66,100 in the previous month, reflecting still strong demand and rising prices in the housing sector. Overall mortgage borrowing was at £7.4 billion, up from £4.2 billion in April and above pre-pandemic averages.

More than 90 per cent of existing mortgage holders will not suffer from the immediate impact of higher interest rates as they are on fixed-rate borrowing schemes. Karim Haji, head of financial services at KPMG UK, said rising inflation would begin to bite into housing demand later this year. “While strong demand for housing continues to boost prices, rapidly falling affordability could be a key driver of a slowdown in the near-term, as higher interest rates are passed on to borrowers,” he said.

Samuel Tombs, of Pantheon Macroeconomics, said the economy was on course to slow as household expenditure was not keeping up with the rising cost of living. “Households still aren’t drawing on their savings or borrowing enough to maintain their level of real expenditure in the face of the huge shock to their real disposable incomes,” Tombs said.

The average interest rate on personal loans fell to 6.49 per cent in May, below the pre-pandemic level recorded in February 2020. Rates on credit cards increased slightly from 18.38 per cent from 18.08 per cent in April, also below 2020 levels.

“Lenders offering unsecured debt are caught between the need to be cautious and providing whatever support they can, such as payment holidays or larger overdrafts and credit limits,” Haji said.